By JLP | April 22, 2010
This week I have been trying to take a long-term look at our finances by peering into the abyss that is retirement when we are 65-years old. It’s a scary undertaking because there are so many unknowns.
In order to look at these numbers, I had to establish some parameters:
• Desired annual income: $100,000 ($222,000 at age 65). We could do with less but we are comfortable with this amount. Some of our bills will be gone (mortgage) but others will pop up (healthcare). I’d rather be safe than sorry so I’m estimating a higher income amount.
• The latest Social Security statement says that our monthly benefit at age 62 is around $2,500, which is not adjusted for inflation. I adjusted the amount for an inflation rate of 3% and came up with $5,700, which I then halved due to the uncertainty with the social security program. That gave me an annual figure of around $34,000.
• My wife has a pension plan. The latest statement says that she could expect a monthly benefit of $2,117 at age 65. I’m not too familiar with this plan but I assume that this number will increase over the years. However, to be conservative, I’ll stick with the $2,117 amount ($25,000 per year).
• That leaves $163,000 per year that must be funded via retirement plans (401(k) and IRAs). At a 4% withdrawal rate, the amount of capital needed to fund $163,000 in income is roughly $4,000,000. That’s a lot of money but it also assumes that the principal doesn’t diminish over the years.
• At our current pace (assuming a 9% rate of return), we should have more than enough to meet that goal. If I assume a 7% rate of return, we’ll have a significant shortfall. But, these numbers are misleading in that they do not reflect raises or profit sharing that goes into the 401(k) on an annual basis.
Yes, there are things to consider. For instance, I used a 3% inflation rate. If inflation runs 4% to 5%, my numbers will change dramatically. Social security could be phased out for those who are deemed “wealthy” by the government’s standards, which would be bad news considering how much money my wife and I have paid into the system already at this point in our lives. But, those things could be offset by saving more money and using principal throughout retirement.
I’ll run some more scenarios in the future to show you what I’m talking about.